Personal finance is a term that covers managing your money, as well as saving and investing. Covers budgeting, banking, insurance, mortgages , investing, retirement planning, and tax and estate planning. It often refers to the entire industry that provides financial services to individuals and households and advises them on financial and investment opportunities.
Understanding personal finances
Personal finance is about meeting personal financial goals, whether that means having enough for short-term financial needs, planning for retirement, or saving for your children’s college education. It all depends on your income, expenses, living requirements and individual goals and desires, and making a plan to meet those needs within your financial limitations. But to make the most of your income and savings, it’s important to be financially literate, so you can distinguish between good and bad advice and make smart decisions.
Key aspects
Few schools have courses on how to manage your money, so it’s important to learn the basics through free online articles, courses, and blogs; podcasts; or in the library
Smart personal finance involves developing strategies that include budgeting , building an emergency fund , paying off debt , using credit cards wisely, saving for retirement, and more.
Being disciplined is important, but it’s also good to know when to break the rules; For example, young adults who are told to invest 10% to 20% of their income for retirement may need to take some of those funds to buy a home or pay down debt instead.
10 personal finance strategies
Setting clear savings goals is the most obvious financial advice, but how do you do it?
The sooner you start financial planning , the better, but it’s never too late to create financial goals that will give you and your family financial security and freedom. Here are best practices and tips for personal finances:
1. Design a budget
A budget is essential to living within your means and saving enough to achieve your long-term goals. The 50/30/20 budgeting method offers a great framework. It breaks down like this:
- 50% of your take-home pay or net income (after taxes) should go toward living essentials such as rent, utilities, groceries, and transportation.
- 30% is allocated to lifestyle expenses, such as dining out and buying clothes.
- 20% goes towards the future: paying off debt and saving for both retirement and emergencies.
Managing money has never been easier, thanks to a growing number of personal budgeting apps for smartphones that put everyday finances in the palm of your hand.
These are just two examples of apps you can use: YNAB, also known as You Need a Budget, helps you track and adjust your spending so you can control every dollar you spend. Meanwhile, Mint streamlines cash flow, budgeting, credit cards, invoices, and investment tracking, all in one place. It automatically updates and categorizes your financial data as information comes in, so you always know where you stand financially. The app will even offer personalized tips and advice.
2. Create an emergency fund
It’s important to “pay yourself first” to make sure money is set aside for unexpected expenses, like medical bills, a big car repair, rent if you get laid off, and more.
Three to six months of living expenses is the ideal safety net. In other words, it is recommended that you have savings that help you live three or six months without receiving income. Financial experts generally recommend putting away 20% of each paycheck each month (which, of course, you’ve already budgeted for!). Once you’ve topped up your crisis fund (for emergencies or sudden unemployment), don’t stop. Continue to funnel the 20% monthly toward other financial goals like a retirement fund.
3. Put a limit on your debts
It sounds simple enough: To prevent debt from getting out of control, don’t spend more than you earn. Of course, most people have to borrow from time to time, and sometimes going into debt can be advantageous, if it leads to acquiring an asset . Taking out a mortgage to buy a house is a good example. But leasing can sometimes be cheaper than buying outright, whether you’re renting property, leasing a car, or even getting a subscription to computer software.
4. Use credit cards wisely
Credit cards can be big debt traps. But it’s unrealistic not to own any in the contemporary world, and they have other applications other than as a tool for buying things. Not only are they crucial for establishing your credit score, but they are also a great way to track spending, which can be a big budgeting help.
Credit just needs to be managed properly, meaning the balance should ideally be paid off every month, or at least kept at a minimum credit utilization rate (i.e. keeping your account balances below 30% of your credit total available). Given the extraordinary rewards incentives offered these days (like cash back), it makes sense to charge as many purchases as possible. Still, avoid maxing out credit cards at all costs and always pay bills on time. One of the quickest ways to ruin your credit score is to constantly pay bills late or, even worse, miss payments. (See Tip No. 5.)
Using a debit card is another way to ensure that you won’t pay for small purchases that accumulate over a long period of time, with interest.
5. Monitor your credit score
Credit cards are the primary vehicle through which your credit score is built and maintained , so watching your credit spending goes hand-in-hand with monitoring your credit score. If you ever want to get a lease, mortgage, or any other type of financing, you’ll need a solid credit history. Factors that determine your score include how long you’ve had credit, your payment history, and your credit-to-debt ratio.
Credit scores are estimated between 300 and 850 in the United States. Here’s a rough way to look at it:
720 = good credit
650 = average credit
600 or less = bad credit
To pay bills, set up direct payment from your debit card whenever possible (so you never miss a payment) and subscribe to reporting agencies that provide regular credit score updates. By monitoring your report, you will be able to detect and address errors or fraudulent activity . American federal law allows you to obtain free credit reports from the three major credit bureaus: Equifax, Experian and TransUnion. Reports can be obtained directly from each agency, or you can sign up for AnnualCreditReport, a site sponsored by the Big Three; You can also get a free credit score on sites like Credit Karma, Credit Sesame, or Wallet Hub. Some credit card providers, like Capital One, will also provide customers with regular complimentary credit score updates. If you are not in the United States you should search your country’s credit rating sites and regularly request your credit score.
6. Consider your family
To protect the assets of your estate and ensure that your wishes are followed when you die, be sure to make a will and, depending on your needs, possibly establish one or more trusts. You should also look into insurance: auto, home, life, disability, and long-term care insurance. And be sure to periodically review your policy to ensure it meets your family’s needs through life’s most important milestones.
Other critical documents include a living will and a health care power of attorney. While not all of these documents affect you directly, all of them can save your family and loved ones considerable time and expense when you become ill or incapacitated.
And while they are young, take the time to teach your children about the value of money and how to save, invest and spend wisely.
7. Pay off student loans
There are countless loan repayment plans and payment reduction strategies available to graduates. If you have a high interest rate, paying down the principal faster may make sense. On the other hand, minimizing repayments (for interest only, for example), can free up other income to invest elsewhere or to save for retirement while you’re young and you’ll get the maximum benefit from compound interest. Some federal and private loans are even eligible for a rate reduction if the borrower enrolls in automatic payment. Flexible federal payment programs worth checking out include:
Gradual repayment: progressively increases the monthly payment over 10 years
Extended repayment : extends the loan over a period that can be up to 25 years
8. Plan (and save) for retirement
Retirement may seem like an eternity, but it comes much sooner than expected. Experts suggest that most people will need about 80% of their current salary in retirement. The younger you start, the more you’ll benefit from what advisors like to call the magic of compound interest: how small amounts of money grow over time.
Setting aside money now for your retirement not only allows for long-term growth, but can also reduce your current income taxes if the funds are placed in a tax-advantaged plan fund such as an Individual Retirement Account (IRA), a pension fund 401 (k) or a 403 (b).
If your employer offers a 401(k) or 403(b) plan, start paying for it right away, especially if they match your contribution. By not doing this, you are giving up free money! Take the time to learn the difference between a Roth 401(k) and a traditional 401(k) , if your company offers both.
Investing is just one part of retirement planning. Other strategies include waiting as long as possible before electing to receive Social Security benefits (which is smart for most people) and converting a term life insurance policy to a permanent life insurance policy.
In Latin America there are mandatory pension funds that employees subscribe to once they enter formal employment. Depending on your case, consider saving in an additional investment fund to supplement your retirement income. If you are a businessman or self-employed entrepreneur, consider saving into a voluntary pension fund as soon as possible and always pay contributions based on the value of your actual income.
9. Maximize tax discounts
Due to an overly complex tax code, many people leave hundreds or even thousands of wasted dollars on the table each year. By maximizing your tax savings, you will free up money that can be invested in reducing past debt, your enjoyment of the present, and your plans for the future.
You should start each year by saving receipts and tracking expenses for all possible tax deductions and tax credits. Many business supply stores sell useful “tax organizers” that have the main categories already pre-labeled. After you get organized, you’ll want to focus on taking advantage of every available tax deduction and credit, as well as deciding between the two when necessary. In short, a tax deduction reduces the amount of income you are taxed on, while a tax credit actually reduces the amount of taxes you owe. This means that a $1,000 tax credit will save you much more than a $1,000 deduction.
If you are in Latin America, seek the advice of an accountant to know how to take advantage of the tax discounts that your government provides you. Always try to pay your taxes early, this frequently generates additional discounts.
10. Give yourself a break
Budgeting and planning can seem full of hardships. Be sure to reward yourself from time to time. Whether it’s a vacation, shopping, or an occasional night on the town, you should enjoy the fruits of your labor. Doing so gives you a taste of the financial independence you’re working so hard for.
Last but not least, don’t forget to delegate when necessary. Although you may be competent enough to do your own tax bills or manage a portfolio of individual stocks, it doesn’t mean you have to do it all yourself. Setting up an account at a brokerage, spending a few hundred dollars on a certified public accountant (CPA) or financial planner, at least once, could be a good way to jump-start your planning.
Three key character traits can help you avoid countless mistakes in managing your personal finances: discipline, a sense of time, and emotional detachment.
Personal Finance Principles
Once you’ve established some fundamental procedures, you can start thinking about your financial philosophy. The key to getting your finances on the right track isn’t about learning a new set of skills. Rather, it’s about learning that the principles that contribute to success in business and your career work just as well in personal money management. The three key principles are prioritization, evaluation and moderation.
Prioritizing means you can look at your finances, discern what makes money flow, and make sure you stay focused on those efforts.
Assessment is the key skill that prevents professionals from being on too many things at once. Ambitious people always have a list of ideas for other ways they can make it big, whether it’s a side business or an investment idea. While there is absolutely a time and place to take a wheel, managing your finances like a business means stepping back and truly evaluating the potential costs and benefits of any new venture.
Moderation is the final skill of successful business management that must be applied to personal finances. Time and time again, financial planners sit down with successful people who somehow still manage to spend more than they earn. Earning $250,000 per year won’t do you much good if you spend $275,000 annually. Learning to restrict spending on non-wealth-generating assets until you’ve reached your monthly savings or debt reduction goals is crucial to building net worth.
Learn about personal finance
Few schools offer courses on how to manage your money, which means most of us will need to get our personal financial education from our parents (if we’re lucky) or learn it ourselves. Fortunately, you don’t have to spend a lot of money to figure out how to better manage your money. You can learn everything you need to know for free online and in library books. Almost all media publications also regularly distribute personal finance advice.
Online Personal Finance Education
A great way to start learning about personal finance is to read personal finance blogs. Instead of general advice, you’ll get personal finance articles, learn exactly what challenges real people face, and how they’re addressing those challenges.
The Mr. Money Mustache has hundreds of posts full of irreverent ideas on how to escape the rat race and retire extremely early by making unconventional lifestyle choices. CentSai helps you navigate a myriad of financial decisions through first-person accounts. And The Points Guy and Million Mile Secrets teach you how to travel for a fraction of the retail price using credit card rewards, and FareCompare helps you find the best deals on flights. These sites often link to other blogs, so you’ll discover more sites as you read.
Of course, we can’t help but toot our own horn in this category. Muy Financiero also offers resources on personal finances in our advice section.
Personal finance education through the library
You may need to visit your library in person to get a library card, but after that, you can check out personal finance audiobooks and e-books online without leaving home. Some of these bestsellers may be available at your local library: “I’ll Teach You How to Be Rich,” ” The Richest Man in Babylon,” “Your Money or Your Life,” and “Rich Dad, Poor Dad.” Personal finance classics such as “Personal Finance for Dummies,” “The Total Money Makeover,” “The Little Book of Common Sense Investing,” and “Think and Grow Rich” are also available as audiobooks.
Free online personal finance classes
If you enjoy the lesson and quiz structure, try one of these free digital personal finance courses:
Morningstar’s Investing Classroom offers a place for beginning and experienced investors to learn about stocks, funds, bonds, and portfolios. Some of the courses you’ll find there include “Stocks vs. Other Investments,” “Methods for Investing in Mutual Funds,” “Determining Your Asset Mix,” and “Introduction to Government Bonds.” Each course lasts approximately 10 minutes and is followed by a quiz to help you make sure you understand the lesson.
EdX , an online learning platform created by Harvard University and MIT, offers at least three courses covering personal finance: Saving Money: Making Smart Financial Decisions from the University of California at Berkeley, Finance for Everyone from the University of Michigan, and Purdue University Personal Finance. These courses will teach you things like how credit works, what types of insurance you may want to carry, how to maximize your retirement savings , how to read your credit report, and what the time value of money is.
Purdue also has an online course on Planning for a Secure Retirement. It is divided into 10 main modules, and each has four to six submodules on topics such as Social Security, 401(k) and 403(b) plans, and IRAs. You’ll learn about your risk tolerance, think about the type of retirement lifestyle you want, and estimate your retirement expenses.
Missouri State University presents a free online video course on personal finance through iTunes. This basic course is good for beginners who want to learn about personal financial statements and budgets, how to use consumer credit wisely, and how to make decisions about cars and homes.
Personal Finance Podcasts
Personal finance podcasts are a great way to learn how to manage your money if you have little free time. As you get ready in the morning, exercise, drive to work, run errands, or get ready for bed, you can listen to expert tips to be more financially secure.
The Dave Ramsey Show is a call-in show that you can listen to anytime through your favorite podcast app. You’ll learn about the financial problems real people face and how a once-bankrupt billionaire recommends solving them.
NPR’s Planet Money Radio and Freakonomics makes economics interesting by using it to explain real-world phenomena like “how we go from mealy, disgusting apples to apples that actually taste delicious,” the Wells Fargo fake accounts scandal , and whether we should still be using cash.
American Public Media’s Marketplace helps make sense of what’s happening in the world of business and the economy. And so, Money with Farnoosh Torab i combines interviews with successful entrepreneurs, expert advice, and personal financial questions from listeners.
If you are in Latin America and/or English is not your thing when listening to podcasts, we recommend this europapress selection of 9 podcasts that will help you learn about personal finance and investment with expert commentators and analysts who will help you discover secrets and advanced tricks for effective money management.
The most important thing is to find resources that work for your learning style and that you find interesting and engaging. If a blog, book, course, or podcast is boring or difficult to understand, keep trying until you find something that inspires you.
And education shouldn’t stop once you learn the basics. The economy changes and new financial tools are always being developed, like those budgeting apps. Find resources you enjoy and trust, and continue refining your money skills from now until retirement and even after that.
Things that classes can’t teach you
Personal finance education is a great idea for consumers, especially young people, who need to understand the basics of investing or credit management. However, understanding the basics is not a guaranteed path to tax sense. Human nature can often derail the best intentions aimed at achieving a perfect credit score or building a substantial retirement nest egg. These three key character traits can help you stay on track:
Discipline
One of the most important principles of personal finance is systematic savings. Let’s say your net earnings are $60,000 per year and your monthly living expenses (housing, food, transportation, and the like) are $3,200 per month. There are options to do with the rest of your remaining monthly salary of USD 1,800 . Ideally, the first step is to establish an emergency fund, or perhaps a tax-advantaged health savings account (HSA), to be eligible for one, your health insurance must be a high-deductible health plan (HDHP). to meet out-of-pocket medical expenses. Let’s say you’ve developed a penchant for designer clothing, and weekends at the beach catch your eye. The discipline required to save rather than spend your money could keep you from spending on those things and save 10% to 15% of gross income that can be accumulated for important long-term investments or emergencies.
Then, there is investment discipline; It’s only for thick-skinned institutional money managers who make a living buying and selling stocks. The average investor would do well to set a profit-taking target and stick to it. As an example, imagine that he bought Apple Inc. stock in February 2016 at $93 and promised to sell when it crossed $110, as it did two months later. But he did not; He ended up exiting the position in July 2016, at $97, giving up gains of $13 per share and the potential opportunity to profit from another investment.
a sense of time
Three years after college, set up the emergency fund and decide to commit. A jet ski costs $3,000, but you think investing in growth stocks can wait another few years; There is plenty of time to launch an investment portfolio, you think, right? However, putting off investing for a year can have significant consequences. The opportunity cost of purchasing the boat can be illustrated through the time value of money. The $3,000 used to purchase the jet ski would have amounted to almost $49,000 over 40 years at 7% interest, a reasonable average annual return for a long-term growth mutual fund . Therefore, delaying the decision to invest wisely can also delay the ability to retire at age 62, as you would like.
Doing tomorrow what you could do today also extends to paying off debt. A credit card balance of $3,000 takes 222 months to pay off if the minimum payment of $75 is made each month. And don’t forget the interest you’re paying: at an 18% APR, it comes to $3,923 during those months. Losing $3,000 to clear the balance in the current month offers substantial savings, almost the same as the cost of the jet ski.
emotional detachment
Personal finance matters are business, and business should not be personal. A difficult but necessary facet of good financial decision-making involves removing emotion from a transaction. Making impulsive purchases or loans to family members feels good, but can have a big impact on long-term investment goals. Your cousin who defrauded your brother and sister probably won’t pay you either, so the smart response is to reject his requests for help. Sure, sympathy is hard to reject, but the key to prudent personal financial management is separating feelings from reason.
Understanding the rules of personal finance
Investing your money in financial instruments provided by certain banks or brokerage entities could be a more beneficial option than simply saving.
The area of personal finance may have more guidelines and “smart tips” to follow than any other. While it’s good to know these rules, everyone has individual circumstances. Here are some rules that the wise, especially young adults, should never break, but should consider breaking anyway.
Save or invest a fixed part of your income
An ideal budget includes saving a small amount of your paycheck each month for retirement, usually around 10% to 20%.
While being fiscally responsible is important, and thinking about your future is crucial, the rule of thumb of saving a set amount each period for your retirement may not always be the best option , especially for young people just starting out in the real world.
On the one hand, many young adults and students must think about paying for the largest expenses of their lives, such as a new car, a home, or a post-secondary education. Potentially going from 10% to 20% of available funds would be a definite setback to making those purchases. Plus, saving for retirement doesn’t make much sense if you have credit cards or interest-bearing loans that need to be paid off right now. The 19% interest rate on your visa card would likely negate the returns you get from your balanced mutual fund retirement portfolio by five times as much.
Additionally, saving some money to travel and experience new places and cultures can be especially rewarding for a young person who is still unsure of their path in life.
Long-term investment / Invest in higher risk assets
The general rule for young investors is that they should take a long-term perspective and follow a buy-and-hold philosophy. This rule is one of the easiest to justify breaking. Being able to adapt to changing markets can be the difference between making money or limiting your losses , compared to standing by and watching your hard-earned savings dwindle. Short-term investing has its advantages at any age.
Now, if you are no longer married to the idea of long-term investing, you may as well stick to safer investments. The logic is that since young investors have such a long investment time horizon, they should invest in higher risk companies , since they have the rest of their lives to recover from any losses they may suffer. However, if you don’t want to take undue risks in your short and medium-term investments, you don’t have to. The idea of diversification is an important part of creating a solid investment portfolio; This includes both the risk of individual stocks and your expected investment horizon.
At the other end of the age spectrum, investors nearing retirement are encouraged to focus on safer investments, even though these may underperform inflation, to preserve capital. Certainly, it’s important to take fewer risks as your money-making years shrink and recover from bad financial times. But at 60 or 65 you could have 20 or even 30+ years ahead of you, so some growth investments might still make sense for you.
